Essential Properties Realty Trust, Inc. — Q3 2023 Form 10-Q
Business context and reporting period
Quarter and nine months ended September 30, 2023. Essential Properties is a REIT focused on long-term, primarily triple-net leases of single-tenant properties to middle-market service-oriented and experience-based businesses. At quarter-end, its portfolio included 1,793 properties, annualized base rent of $341.8 million, and 99.8% occupancy. Weighted-average remaining lease term was 13.9 years; weighted-average rent coverage was 4.0x.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $91.7 million | $70.7 million | $261.9 million | $212.2 million |
| Net income | $46.1 million | $36.6 million | $142.1 million | $99.2 million |
| Net income attributable to stockholders | $45.9 million | $36.4 million | $141.6 million | $98.8 million |
| Diluted earnings per share | $0.29 | $0.26 | $0.94 | $0.74 |
| Operating cash flow | — | — | $182.0 million | $154.6 million |
| Cash NOI (non-GAAP) | $83.8 million | $67.8 million | $239.0 million | $195.1 million |
Q3 revenue increased 29.7% and stockholder-attributable net income increased 26.0% year over year. For the first nine months, revenue rose 23.4% and attributable net income rose 43.4%. Management attributed revenue growth mainly to portfolio acquisitions and rent escalations. Cash NOI increased approximately 23.6% for Q3 and 22.5% for the nine-month period. GAAP operating and net margins were not stated as headline measures in the filing.
At September 30, total debt principal was $1.605 billion, versus $1.430 billion at December 31, 2022. Net debt was $1.563 billion. Debt after swaps had a weighted-average interest rate of 3.5%, compared with 3.3% at year-end 2022; the debt table’s unhedged stated-rate average was 5.5%. Cash and cash equivalents were $36.1 million, restricted cash $5.9 million, and the $600 million revolving facility was undrawn. The 2029 term loan had $75 million remaining to draw at quarter-end; that amount was borrowed in October.
Material changes versus the prior comparable period
- Rental revenue increased 30.7% in Q3 and 23.6% over nine months, primarily reflecting acquired properties and contractual rent escalations.
- Interest expense rose 27.7% in Q3 and 30.4% over nine months, reflecting higher debt balances and interest rates. Interest-rate swaps generated gains recorded as reductions to interest expense of $7.5 million in Q3 and $19.5 million year to date.
- Nine-month impairment expense declined to $1.6 million from $10.5 million. Net gains on property dispositions were $19.3 million versus $18.1 million for the nine-month periods.
- Investments in real estate, including capital expenditures and construction in progress, totaled $690.1 million during the nine months; acquisitions comprised 199 properties for approximately $691.4 million including acquisition costs.
- Common shares outstanding increased to 156.0 million from 142.4 million at year-end 2022, reflecting equity issuance. The September offering’s forward-sale shares were not yet physically settled at quarter-end.
Outlook, risks, contingencies and unusual items
The filing provides no quantified earnings or acquisition guidance. Management said cash from operations, cash on hand, available borrowing capacity, expected equity proceeds from forward-sale commitments, and potential asset sales should fund operations and current commitments for the foreseeable future. The company targets net debt generally below six times annualized adjusted EBITDAre; annualized adjusted EBITDAre at quarter-end was $346.0 million, a company-defined non-GAAP run-rate estimate.
The company had $157.6 million of remaining commitments to fund tenant construction, development and renovation costs, expected by September 30, 2024. It also reported seven properties under contract for $22.7 million as of October 23. After quarter-end, it invested in 12 properties for $39.0 million, funded a further $10.7 million of construction and tenant reimbursements, and sold one property for $5.1 million gross.
Management highlighted risks from tenant financial performance and defaults, property-market conditions, access to debt and equity capital, interest-rate changes and refinancing costs, and the ability to maintain REIT qualification. Most term-loan debt is floating-rate but hedged; the revolver, if drawn, bears a variable rate. The company was in compliance with debt covenants and reported no material legal or regulatory proceedings known to management and no material environmental claim. It reported no material changes to the risk factors in its 2022 Form 10-K.
Other notable items: the company repaid its $200 million 2024 term loan in August using proceeds from the new 2029 term loan and recorded a $0.1 million extinguishment loss. It expects $30.5 million of accumulated hedge gains to be reclassified as a reduction of interest expense over the next 12 months. Nine-month dividends declared totaled $0.835 per share; $43.9 million was payable at quarter-end.
Important facts for investors to verify
- Whether rent collections, tenant credit quality and occupancy remain consistent with the reported 99.8% occupancy and 4.0x portfolio rent coverage.
- How the $157.6 million tenant-funding commitment is funded and whether it produces the contracted rent increases or interest income.
- The effective cost and hedge coverage of debt, including October’s additional $75 million 2029 term-loan borrowing, and future refinancing exposure.
- Settlement timing and dilution from the September offering and other outstanding forward-sale agreements; the September offering’s estimated net proceeds were $261.9 million upon full physical settlement.
- Growth in recurring cash earnings versus gains on dispositions, straight-line rent, hedge accounting effects and other non-GAAP adjustments; review the company’s FFO, Core FFO, AFFO and adjusted EBITDAre reconciliations.